HDFC Bank-HDFC Merger: The Impact On Borrowers And Depositors

With Housing Development Finance Corp. and HDFC Bank Ltd. set to merge over the next few weeks, it is bound to raise questions among customers of the housing finance company.

Following the merger, HDFC's customers will be served by HDFC Bank. The migration of HDFC's loans and deposits to HDFC Bank will also involve a transition, which may impact the rate of interest paid on home loans and the interest earned on deposits.

"The rate can't be at a detriment to the current; otherwise, the customer has a choice to exit," Srinivasan Vaidyanathan, chief financial officer at HDFC Bank, told analysts in an April 21 conference call, referring to existing interest rates for HDFC's home loan borrowers.

While HDFC currently uses an internal benchmark rate called the Retail Prime Lending Rate, HDFC Bank cannot adopt the same on account of banking regulations. The loans would, therefore, need to migrate to a Marginal Cost of Funds-based Lending Rate or an external benchmark lending rate.

All retail, MSME, and other floating-rate loans sanctioned by HDFC would also need to be linked to an appropriate benchmark rate within six months from the effective date of the merger.

HDFC Bank expects the merger to be effective on July 1, Deepak Parekh, chairman at HDFC, said on Tuesday.

"Based on the switch to new benchmarks, the rates may change or they may keep it same. But I feel that HDFC Bank, being such a big brand, they will try to be competitive," Pankaj Mathpal, chief executive officer of financial planning firm Optima Money Managers, told BQ Prime.

The bank will follow a six-month timeline to do a fresh assessment of loans after the merger, Vaidyanathan said in the April 21 call. Following the assessment, HDFC Bank will make fresh offers to customers, who will then have the choice to opt for the new market benchmark-linked interest rates.

"We don't think this is going to be a material item. Therefore, borrowers will continue to be able to see decent offers coming in," Vishal Dhawan, a certified financial planner and founder of Plan Ahead, told BQ Prime.

On the deposit side, although HDFC offers higher interest rates than HDFC Bank, that will cease to happen following the merger. But existing depositors will continue to earn the promised interest rates.

"All depositors will get the rate of interest which we have committed until the tenor of the deposit," Parekh said on Tuesday.

Depositors always look at two things: safety and yield, Harshvardhan Roongta, chief executive officer of Roongta Securities, told BQ Prime. "When it comes to maturity, if at that time you feel that HDFC Bank is offering a lesser interest rate as compared to Bajaj Finance or Mahindra Finance, then there could be some kind of discussion about moving deposits," he said.

But many people would also accept a slightly lower yield from HDFC Bank since they feel it's a safer place to park money, Roongta said. If you're going to Bajaj Finance Ltd. and it offers only 0.25% extra, then you may feel that HDFC Bank is better even with a lower rate, he said.

In addition to the changes on loans and deposits, HDFC's operations will also move to HDFC Bank, which could also present some teething issues for customers.

"People are wondering what happens to their auto-collection mandates, there are questions around tax certificates, etc. The way to think about this is that customers shouldn't wait till the last minute to get access to this kind of stuff," Mathpal said, referring to how the merger may elongate some of these processes.

The good part is that since the process is expected to close in the current financial year, there is enough buffer time to access the necessary documents, he said.

HDFC Bank and HDFC will both hold board meetings on Friday, after working hours. Following the meetings, July 1 is expected to be the effective date for the merger.

Shares of HDFC Bank and HDFC were both up by over 2% as of 1:40 p.m. on Wednesday, as compared with a 1.69% rise in the benchmark Nifty Bank index.